c. work together to magnify the price impact of a change in interest rate. Inflation risk is the risk that the yield on a bond will not keep pace with purchasing power (in fact, another name for inflation risk is purchasing power risk). The case of reinvestment risk can also be seen in callable bonds. If we consider both types of bonds with the same maturity, we will be able to experience a sharper decline in the price of zero-coupon bond due to the interest rate rise as compared to the coupon bond. A rise in interest rates could see a fall in bond prices. This keeps the issuer from calling away high-coupon investments when market rates fall. A bond that has high coupon is more dependent on reinvestment income because more money needs to be reinvested at the YTM to maintain the YTM. What impact do interest rate changes have on bonds? I empirically test this reinvestment risk mechanism. RISKS in BOND INVESTING Reinvestment Risk Reinvestment risk is the risk that the bondholder will reinvest the cash flows received from a bond at lower interest rates. The risk is that you will not be able to find the same rate of return on your new investment as you were realizing on the old one. Reinvestment risk is most common in bond investing, but any investment that generates cash flows exposes the investor to this risk. b. are two bond risks related to credit risk. How much reinvestment risk is present in a bond depends on several factors such as coupon rate and bond’s maturity. Longer maturity = greater reinvestment risk because of TMV impact of reinvested funds. Dreary. Key Takeaways Key Points. , T

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